The Employer/Employee Relationship in Workers Compensation

November 2000

In these changing business times, it is often
difficult to discern who the real employer is with regard to the employer/employee
relationship. The traditional employer/employee relationship is being eroded
as employers turn to temporary agency workers, independent contractors, and
leased employees to enhance their competitive advantage. This article explains
the common-law method of defining the employer/employee relationship and provides
cost saving tips for risk management.

It is a basic fact that an employer or institution does not have to pay workers
compensation if the person injured is not an employee. In these changing business
times, it is sometimes very difficult to discern who the real employer is with
regard to the employer/employee relationship. Business has to be more flexible
in our global economy and, as a result, the traditional employer/employee relationship
is being eroded.

This relationship, in the past, had a very simple definition. In the traditional
employer/employee relationship, an employer hired, supervised, and paid the
employee. In today's business world, this traditional relationship is being
replaced to meet flexible labor needs. Employers are beginning to use temporary
agency workers, independent contractors, and leased employees to enhance their
competitive advantage. By doing so, however, employers risk increasing their
workers compensation liability.

Defining the Employer/Employee Relationship

Initially, 35 states use the common-law method of defining the employer/employee
relationship. Some of the factors that courts have used to determine this relationship
are as follows:

The person in the general employ of another can be transferred to another
employer and become the employee of the second employer.

Whether or not the transferred employee becomes the employee of the
second employer depends on whether the first employer passes to the second
employer not only the right to control the employee's work, but also their
manner of performing it.

It is enough to establish the employer/employee relationship if the
employer has the right to control the employee's manner of performance of
work regardless of whether the right is ever exercised.

Facts which indicate that an employee remains in the original employer's
service include the following.

The original employer's right to select the employee to be loaned
and to discharge that person at any time and send another person in
his place.

The loaned employee's possession of a skill or special training
required by the work for the second employer and employment at a daily
or hourly rate for no definite period.

As can be seen by these factors, the common-law test for an employer/employee
relationship is one of balance. A court looks at all of the factors as established
by the facts of the case and then makes a value judgment as to whether or not
an employer/employee relationship exists.

Consider this example: Acme Company hires an employee from Beta Temporary
Employer Service. The Acme Company supervises the employee and directs his daily
work. Further, Acme has the right to send the worker back to Beta Temporary
Agency if that worker is not doing a good job. The employee is paid by Beta
Agency.

Under these facts, most employers would think they have no workers compensation
liabilities since they hired a "temp" from Beta Agency. Unfortunately, that
is not the case. Without a contract clearly designating the responsibilities
of the parties, the court would rely on common law. Under the factors I have
previously mentioned, most courts would determine that the worker is an employee
of Acme Company. In this type of situation, it is very difficult for an employer
because usually that employer does not have workers compensation insurance for
the borrowed employee.

Independent Contractors

In an effort to avoid an employer/employee relationship, some businesses
are hiring independent contractors. Again, the test for an independent contractor
as opposed to an employer/employee relationship is one of common law. The courts
look at the following factors.

Control of the manner in which work is to be done

Responsibility for result only

Terms of agreement between the parties

The nature of the workers occupation

The skill required for performance

Whether one employee is engaged in a distinct occupation or business

Which party supplies the tools

Whether payment is by time or by the job

Whether the work is part of the regular business of the employer and
the right of the employer to terminate the employment at any time. [Hammermill
Paper Company v Rust Engineering, 243 A2d 389 (1968)

Courts across the country have indicated that these factors are part of a
balancing or weighing test. The relationship will be determined by the facts
of each case. For instance, Acme Company, which produces widgets, hires a plumber
to repair a leaking water pipe. The plumber has done the job for a set amount,
and Acme Company does not supervise the plumber's work. The plumber is not paid
by the hour and receives no benefits from Acme Company.

In this situation, it is clear that the plumber is an independent contractor.
While he is paid by Acme Company, he is not there as part of their regular business.
In addition, he has a special skill and supplies his own tools. Further, he
receives no healthcare or retirement benefits from Acme Company and does not
receive a W-2 Form.

If an employer exercises more control or uses a different method of payment,
an independent contractor can suddenly become an employee. This is a situation
most employers would want to avoid.

Professional Employer Organization (PEO)

The third change to the employer/employee relationship occurs with professional
employer organizations. A professional employer organization or PEO is an organization
that leases employees to an employer in a long-term relationship.

Florida statute defines "employee leasing" as, "an arrangement whereby, a
leasing company assigns its employees to a client and allocates the direction
of and control over the leased employees between leasing companies and a client."
The professional employer organization is different from a temporary agency.
The relationship with a PEO is a contractual relationship between the leasing
company and its client company.

The contracts vary widely, but the PEO usually assumes the responsibility
of an employer for specific purposes only on a long-term basis. The specific
purposes must be defined in a contract. The contracts are not standard. Some
allow retroactive cancellation, some include indemnification and hold harmless
clauses in favor of the PEO and specifically indicate that the business owner
is the responsible party for discrimination type claims. In most cases, the
client company remains in charge of the daily operations and remains charged
with the implementation of work place safety or daily employment issues.

In the 15 states that are considering or have allowed PEOs, Florida can be
used as a model. In Florida, professional PEO's have been very successful.

The right of direction and control is usually found in the agreement for
services contract between the client and the PEO. In Florida, the term "co-employment"
best fits the situation. The responsibilities are shared between the client
and the PEO with the PEO taking the "administrative employer role," and the
client remaining in charge of the product or service of the client company.
This relationship, once defined by statute, eliminates many of the problems
inherent in determining who the correct employer is. Both the PEO and the client
are considered the employer.

However, both the federal government and the other 35 states are still operating
under the common-law rules. Under Florida regulation (468.529), the PEO is responsible
for the payment of wages and taxes, including state unemployment tax. There
was also a federal court ruling, USA v IMRC Garami,
indicating that a business owner may remain responsible if it is determined
to be the actual employer of the leased workers with regard to federal taxes
and penalties if the taxes are not remitted properly. This case shows that the
federal government is still operating based on the common law tests of who controls
the employee.

As previously noted, 15 states recognize PEOs. Some require registration;
some do not. Florida is the only state that grants potential immunity to a PEO
if it obtains workers compensation coverage. As such, no client can rely on
transferring liability for its workers compensation problems by using a PEO.

Summary

In summary, the employer/employee relationship is ever changing in today's
business world. Employers must be careful to determine who their employees are.
If temporary employees are going to be used, it is incumbent on the employer,
in most states, to abstain from controlling the temporary employees as much
as possible. Otherwise, workers that the employer thought were independent contractors
or employees of a temporary agency could become their own borrowed employees.

The following are some cost-saving tips for risk management with regard to
the employer/employee relationship.

When in doubt, have a written contract designating the responsibilities
of the parties.

If dealing with any temporary agency, make sure that temporary agency
has a workers compensation policy that covers the employee that is coming
to your facility.

If using a PEO, make sure to investigate thoroughly its legitimacy.
Further, attempt to obtain an indemnity agreement holding the employer harmless
or indemnifying the employer for any workers compensation injuries suffered
by the employees of the PEO.

Always keep the common-law rules in mind. The one overriding factor in the
common law is control of the employee. The less control exerted by the alleged
employer, the greater the chance the worker will not be considered an employee.

Opinions expressed in Expert Commentary articles are those of the author and are
not necessarily held by the author's employer or IRMI. Expert Commentary articles
and other IRMI Online content do not purport to provide legal, accounting, or other
professional advice or opinion. If such advice is needed, consult with your attorney,
accountant, or other qualified adviser.